What is Cost Per Acquisition (CPA) and Why Is It Important?

For a lot of online businesses, driving paid traffic to your website is a great way to increase sales. There are plenty of metrics used to determine the success of this kind of paid advertising, but one of the most important is CPA.

When you're building a campaign and getting customers into your marketing funnel, there can be several goals along the way - getting them to sign up for your mailing list, delivering your value proposition, making your business seem as enticing to them as possible, etc. But these goals are generally a means to an end. The real purpose of marketing isn't just to get people aware of your business. It's to actually get them to make a purchase. If all the money you're spending is resulting in a great deal of awareness but very little revenue, that would indicate an unsuccessful campaign.

That's where CPA comes in. CPA stands for Cost Per Acquisition - it's a metric that measures how much money you're spending per per customer gained. It's a crucial metric for evaluating the effectiveness of any marketing campaign.

Read on for a more detailed explanation, and some tips for getting started thinking on how you can use CPA to evaluate your paid advertising.

CPA In Brief

What Is CPA?
The major factor that distinguishes CPA from other metrics like cost-per-conversion or click-thru rate is simple - revenue. While cost-per-conversion can refer to things like newsletter signups, CPA refers exclusively to measuring how much you've spent on your campaign against how many purchases you've actually gained from doing so.

It's easy to see why CPA is often considered the most important metric (or sometimes even the only one that matters!) - your email marketing campaign could generate all the leads in the world, but if these leads aren't resulting in actual purchases, it won't mean a thing. You'd be spending more money on customers than they're worth.

What Your CPA Should Be
So what makes a good CPA? How much should you be spending per new client? The truth is, every business is going to have different answers for these questions.

The key to determining a good CPA lies in your average revenue per customer. Once you know how much money you can get from a customer, you'll have a better idea of how much you should be spending to win that customer over. For example - if you're spending $100 per customer, but only getting $50 in revenue from them, that would obviously indicate a poor CPA.

A good way to determine your average cost per customer is to use the following formula: take your total revenue over a period of time, and divide it by the number of customers you had during that period. So if you spent $1000 on advertising in July and made 10 sales, then your CPA would be $100. Simple, right? It gets a little more complicated when you take into account purchase frequency per account and average order size, but this should give you a good start.

You can use this number to get a basic idea of which areas of your paid advertising are performing up to your standards, and which are costing you more than they're worth.

Tracking CPA
For an Ecommerce business, tracking CPA is simple. You can pretty easily include custom links and look at where the sources of your sales are. You can also create prompts to describe how paying customers heard of your business and what convinced them to purchase. It's important to give them some incentive for taking time out of their day to do so.

Using CPA In Marketing
Two of the most popular ad networks, Facebook and Google, let you pick out a target CPA that you want to hit for your business that they will then utilize in your paid campaign.

There are different metrics you can target with Google's Smart Bids features, but CPA is one of the most popular. Here's how it works:

Using historical information about your campaign and evaluating the contextual signals present at auction-time, Target CPA bidding automatically finds an optimal CPC bid for your ad each time it's eligible to appear. Google Ads sets these bids to achieve an average CPA equal to your target across all campaigns using this strategy.

In other words, Google uses its vast wealth of data and algorithms to deliver your ads to potential customers with varying chances of conversion. Some clicks will cost more per click than others, but the idea is that Google, with its knowledge of your past performance with certain types of customers, will come as close as possible to your target CPA with this combination of higher and lower value clicks. This might sound complicated, but luckily it doesn't require much effort on your end - Google does most of the heavy lifting for you.

Facebook uses a similar system - like Google, it has very advanced targeting capabilities, and enables you to pay when you have reached your desired goals.

Now that we've got the basics out of the way, let's take a look at a couple things you can do to lower your CPA: increasing conversions or lowering your cost-per-click rate.

Lowering CPA By Increasing Conversion Rate

Generally, your CPA will be higher than your cost-per-click, since not everyone who clicks your ad will make the jump to being a customer. It stands to reason that increasing your conversion rate goes hand-in-hand with lowering your CPA. Tips for lowering your CPA, then, will often reflect more general best practices for marketing.

Check out our article (linked above) for more detailed information, but, to summarize it in brief, your landing page should:

Include a solid ‘Call to Action’.

Use compelling copy.

Use images that connect with your audience.

Be mobile friendly.

Optimize Your Website With A/B TestingA/B testing is a method of comparing two different versions of your website (or elements on your website) to determine which one is more effective. Using A/B testing, you can generate concrete data on what elements are contributing to an increased conversion rate and which ones aren't. This will enable you to update your website to increase conversion, and, by doing so, decrease CPA.

Increase Your Retargeting EffortsRetargeting enables you to gain back users who previously might have expressed interest in your website but didn't make the jump to becoming a customer. Retargeting ads let you connect to these almost-customers by showing them ads that will compel them to give your site another look. This will hopefully, in turn, increase your conversion rate, and give your efforts to lower your CPA another boost.

Eliminate Paid Ads and Keyword Bids That Aren't Converting
Paid ads that don't lead to conversions are a drain on your marketing budget. If you're spending a bunch of money on ineffective advertising, your CPA will be much higher. Monitor where the bulk of your conversions are coming from, and cut off those advertising avenues that aren't performing well.

If you're reluctant to put a stop to these underperforming ads, and think they might be more valuable in the future, at least consider putting a temporary stop to them until you can optimize them fully. As your budget increases, you may have more of an opportunity to develop these ineffective avenues and make them more of a solid option. But if you don't have the money to throw around on ads that aren't giving you a return on your investment, refocus your efforts on the ones that are.

This goes for your bids on keywords, as well. If you're getting a lot of clicks on certain keywords, but your actual content turns out to be irrelevant to the user's interests, this will contribute to a high CPA as well. Eliminate keywords that aren't relevant to your marketing goals. Take this opportunity to do further keyword research to discover ones that will be more in line with these goals.

Growing your mailing list, then, should be a top priority for your website. You can ask for lots of information from visitors - but you should, at the very least, ask for an email address. This will enable you to contact them directly, with much lower overhead costs than buying ads through Facebook or Google. Delivering something valuable to these users and promoting loyalty with them is key.

Getting more potential customers on your mailing list is one of the most affordable ways for increasing conversion, so bolstering your paid ad efforts with a solid email marketing campaign is essential.

Optimize Ads On Mobile Platforms
Your entire customer experience should be optimized for mobile users, and your ads are no different. Just because your ad may be mobile-friendly doesn't mean it's effective.

Check your conversion rates after introducing new mobile ads. Make sure these ads are contributing to the user experience. These ads shouldn't just do the same thing on mobile that your other content does - they should utilize the unique qualities of the mobile platform to a deliver a unique experience.

Make Sure Your Website Delivers
Even a great ad campaign won't mean a thing if your website experience doesn't measure up to what was promised. Website time-outs, freezing, and slow loading times are all factors that can contribute to lower conversion rates. Make sure your website is optimized to be as user-friendly and error-free as possible.

Lowering CPA by Decreasing Cost Per Click

While the tips above have focused on increasing profitability after a user has already clicked on your paid advertisement, let's take a look at what comes before. Google AdWords can be incredibly competitive, but keeping your cost-per-click low is a crucial part of the equation, so here are some pointers on accomplishing this goal:

Understand Quality Value
Each keyword in your AdWords account has a Quality Score between 1 and 10. This is an estimate of the quality of your paid ads that are delivered to each keyword. On average, the higher the Quality Score, the lower the cost-per-click. Increasing your Quality Score is a whole other article for another day, but there are lots of sites out there that can help you with this.

Find Lower Cost Keywords
Another way to lower your CPA is to find new keywords with lower CPCs. This will enable you to spread your budget out a little bit more, casting a wider net for the same total cost.

That's not to say you should just throw your money around - if you have the highest bid on keywords nobody is searching for, that won't do you much good. Ideally, the different keywords you find would strike a good balance between low competition and high search volumes.

Lower Your Bids
Bidding on Google AdWords is a balancing act between your ad's Quality Score and the maximum bid you're willing to make. If you increase your Quality Score, you can potentially afford to lower your max bid, while still remaining competitive even with competitors who are bidding more aggressively.

Make Your Ads More Relevant
If your ads aren't relevant to the interests of users, this will have a negative impact on your Quality Score and increase your CPA. Google AdWords allows you to examine the rationale behind every Quality Score - if your ad is labelled as Below Average in relevance, it's time to rethink it. Either edit the ad to bring it more in line with what users are searching for or create new ads. Include keywords from the ad group into your ad's headline and description to ensure the highest relevance score possible.

Conclusion

There's no set value of what an ideal CPA should be - it's different for every business. Some business models can afford to pay for a larger number of clicks that don't necessarily convert, if the revenue they're getting for each individual customer is high enough.

CPA is an essential metric to understand if you hope to turn a profit on your paid ads. By understanding how much you're paying per customer gained, you can evaluate the true effectiveness of a campaign based on actual revenue generated. Don't get too hung up on all this, though - an effective ad campaign is no substitute for delivering a great customer experience that will drive traffic to your website.

But neglecting paid advertising can be a major oversight, depending on your business. Millions of people use Google to find billions of pages per day - how many of those people are just waiting to stumble across yours?